Europe is ignoring Asia’s lesson of 1997

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As Greece burns, European officials fiddle and Asia braces for another global crisis, my thoughts are with Thailand. This summer marks the 15th anniversary of the baht devaluation that ignited one of history’s worst meltdowns.

Thailand’s plunge ricocheted from Indonesia to South Korea to Malaysia before heading west. The pain went global with Wall Street’s Dow Jones index plunging more than 500 points in a single trading day, hedge funds blowing up and giant bailouts becoming a norm.

Fifteen years on, the world finds itself upside down. In 1997, Asia sent contagion to the West; since 2008, Europe and the US have returned the favour by sending turmoil eastward.

Now, Europe is looking to deep-pocketed Asian nations for help. It should be doing something else: learning the lessons from Asia’s collapse and impressive revival.

Asia showed the world the danger of ill-timed austerity, denial and slavish devotion to conventional economic policies amid very unconventional circumstances. Why, then, is Europe resorting to a crisis-response toolbox that Asia clearly demonstrated doesn’t work?

Europe is still putting politics ahead of economics. In doing so, it’s missing two things Asians long ago accepted and internalised. One, the nature of the global financial system is shifting faster than summits and communiques can follow. Two, we live in a world without reliable economic engines.

The former problem can be seen in the austerity obsession emanating primarily from Berlin. It’s one that can be traced back to the flawed advice officials in Washington doled out to Asia in 1997.

Back then, the US Treasury and the International Monetary Fund demanded that Asia keep interest rates high to support currencies and cut government spending and debt.

Of course, even the US blew off these suggestions, and more, after the 2008 failure of Lehman Brothers Holdings – just as Asians had 10 years earlier. Once officials in Bangkok, Jakarta and Seoul replaced belt tightening with more nuanced policies, growth returned and investors rushed back to the region. Today, it’s outperforming economies in Europe and the US by a wide margin.

The latter problem – the unreliability of global economic engines – means that Europe’s need for stimulus is greater than Asia’s was in the late 1990s.

At that time, the US was indeed an ”oasis of prosperity”, as then Federal Reserve chairman Alan Greenspan called it. Today, Europe is looking at a vastly different global environment. And yet the region is experiencing what can best be described as a bubble in austerity.

The US economy is limping along, Japan’s deflation is deepening and China is slowing. Next week is expected to bring news that China’s manufacturing shrank for a seventh month in May. So much for China riding to Europe’s rescue with its vast state wealth and even bigger ambitions. Just three months ago, the chatter was about Asia’s biggest economy becoming Europe’s sugar daddy. Europe is imploding.

China has $3.3 trillion (R27.6 trillion) of currency reserves. What better way to deploy those riches, many mused, than to save the euro zone and capitalism in one fell swoop? That was until Europe’s mess boomeranged on China.

Nowhere are these worries more on display than in Hong Kong. The benchmark Hang Seng index has slumped 14 percent from this year’s peak on February 29 as investors fret about how Europe will affect China. Far from reassuring markets, European leaders are clashing over how to contain their crisis. They can’t.

Each Greek bailout only highlights the futility of political solutions to a flawed economic union. Denial has delayed the inevitable departure of Greece and now speculators have a much bigger target in their sights – Spain, the 12th-biggest economy.

That was roughly Korea’s global ranking in 1997, when its entrapment by Asia’s crisis turned a regional problem into a global one. Europe is forgetting that the quicker you deal with the root of financial problems, however painful that may be, the quicker you can recover from them. To do that, you need growth. You also need to be bold.

William Pesek is a Bloomberg View columnist. The opinions expressed are his own.


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